Societe Generale Issues Devastating Guide To Why Government Spending Cuts Will Be A Complete Disaster For America

As politicians around the world debate whether it is better to stimulate a weak economy through additional spending, or cut spending to the bone in the hope of reducing debt, one simple fact is frequently forgotten…

It all depends on your country and its current situation according to Societe Generale in a new October report on austerity.

Why is it necessary for European countries to deliver austerity plans?

Answer: 'Because, if governments do not rapidly address their debt problems, the cost of debt could explode, as in Greece. Thus, fears of escalating interest rates and the resulting dire consequences for their economies are seen to justify the need for austerity measures.'

But America does not face these immediate bond market problems...

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

The current European debt trajectories are clearly unsustainable and Ireland's is just insane

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Spending cut announcements have done nothing to placate European bond market concerns... America does not have these concerns right now

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

The U.S. could one day be forced to enact European-style austerity measures if the worst debt forecasts come true...

..but the most likely case is that debt will moderate because America's latest debt surge is mostly the result of emergency measures only.

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Hopefully the end of U.S. stimulus doesn't crash the stock market as it did back in 1937

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

What's crazy is that history shows austerity measures frequently fail

'Question 3: Do past examples fully justify these austerity measures?

Answer: No. Three major differences with the situations observed in Canada and Sweden in the 1990s suggest that not all the austerity plans will be successful and point to a major risk on economic growth if governments implement austerity plans in an uncoordinated manner.'

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Yes, Sweden succeeded when it tried to drastically cut spending after the late 1990s.

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Canada has succeeded in the past with spending cuts as well

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Success or failure depends on your country's unique situation...

Austerity only works for a weak economy when there A) is a strong social safety net, and B) hasn't been a sharp spike in unemployment

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Unfortunately, America has a weak social safety net and just experienced massive job losses

This means that sharp spending cuts would likely be disastrous for both the economy and society. People have just seen too much pain in a short time already and there's little support for them from society as compared to many other nations.

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

Germany, France, and Italy have strong safety nets and didn't experience as severe job losses as America did

Thus they are prime candidates for austerity right now.

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

So how do you play austerity vs. stimulus?

Austerity is generally good for bonds, while stimulus is good for stocks

So you play the markets relative to the country you are dealing with and which path they take.

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

There are many ways to deal with a debt problem, beyond just slashing government support

Source: Societe Generale, 'All you ever wanted to know about European austerity plans'

So which will America choose?

Maybe it's obvious.

Now see...

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